The coffee industry changed forever on June 26, 1992 when Starbucks Corp. (SBUX), a growing Seattle chain, completed an initial public offering on the NASDAQ exchange. The company was operating 140 stores in the northwestern U.S. and Canada at that time, and wanted to expand its reach to the rest of the country and worldwide. Five stock splits and two decades later and it is still a top performer, as well of one of the most successful retail franchises of all time.

Vermont-based Green Mountain Coffee Roasters went public just one year later with a narrow focus on distribution and delivery systems, unlike Starbucks’ retail approach. In 1996, Green Mountain bought a 35% stake in Keurig, accessing single cup technology that now forms the basis for its worldwide operations. They completed acquisition in 2006 and subsequently rebranded to become Keurig Green Mountain Inc. (GMCR).

Worldwide consumers currently grind their way through more than 141 million 132-pound bags of coffee beans per year, with 25% growth rate expected into 2020. Both companies are perfectly positioned to benefit from these bullish trends but which one will offer the highest returns for investors and market timers, and what other issues could drive stock valuation during this period?

SBUX Vs. GMCR Performance 2009-2015

SBUX vs. GMCR Performance

Starbucks got hit much harder than its competitor during the 2007 to 2009 bear market, losing more than 80% of its value before bottoming out at $3.53 in late 2008. Green Mountain just ground sideways during the deep recession, hitting its lowest low at $5.11 around the same time. The tight alignment between these numbers assists the comparison of returns during the current bull market, which began in March 2009.

Starbucks has risen just over 1500% through the first half of 2015, while Green Mountain has risen just over 1600%. These mark essentially identical returns, given single digit benchmarks printed in 2008. However, monthly charts show markedly different paths to these returns, with SBUX riding higher in a graceful uptrend as high volatility has infected GMCR, with steep rallies and sell-offs that have picked the pockets of poorly-timed market entries.

Both charts have their appeal because some investors will appreciate SBUX’s steady returns while others will see GMCR’s steep decline off the November 2014 high at $159 as a long-term buying opportunity. That makes sense if the stock price recovers, even lifting GMCR into significant leadership over SBUX. In fact, if it can get back to the 2014 high, the bull market return will jump from 1600% to over 3000%.

A 10% Keurig stake bought by Coca-Cola Co. (KO) in February 2014 lowered volatility levels and improved performance through most of that year. While volatility has increased in 2015, the relationship should offer significant benefits in coming years, improving distribution channels while expanding branding opportunities. Coca-Cola increased its commitment to a 16% stake in February 2015, generating rumors that the soft drink giant will eventually purchase the entire company.

Dividends

DIVIDEND HISTORY

YEAR

SBUX DIVIDEND YIELD

GMCR DIVIDEND YIELD

2009

0

0

2010

1.12%

0

2011

1.22%

0

2012

1.34%

0

2013

1.14%

0

2014

1.34%

.76%

Starbucks shows a stronger dividend history than its rival, instituting its first payout in 2010 with a 1.2% yield and continuing close to that rate into 2015. According to company documents, it is committed to raising that number by one cent more than the previous year’s growth. It is also buying back shares as part of more than a $5 billion commitment to building shareholder value. The company split 2:1 on April 9, 2015.

Keurig paid the first dividend in its history in 2014, returning capital to shareholders through a $1 billion repurchase plan and $1.00 per share dividend program. The yield is currently around half of its rival’s payout and is unlikely to rise in the near future, given a sharp sales decline in the new generation of Keurig machines, which only use company-branded coffee pods. The company has admitted its error, vowing to correct this flaw in future versions.

Technical Outlook

Starbucks hasn’t undergone a major correction since October 2014 and is trading at an all-time high. While many investors like to buy securities at new highs, it is now priced for perfection, with any slump in sales growth likely to trigger a 20% to 30% pullback. A more cautious entry approach would be to remain patiently on the sidelines until that type of bargain entry sets up on the long-term chart.

Keurig’s sales miscues have hurt its performance but technicals are slowly lining up in its favor. It has fallen nearly 50% off the 2014 high, a typical corrective percentage, and has reached support at the 200-week moving average. However, there is no evidence of accumulation at this point, which is troubling because broad averages are at near bull market highs. The best advice is to wait until tier-one institutions declare the stock to be undervalued, perhaps signaling a perfect time to get on board.

The Bottom Line

Starbucks and Keurig Green Mountain Coffee have booked nearly identical returns since the end of the bear market, but the two companies have traveled markedly different paths to those numbers.

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